German Chancellor Angela Merkel delivered a long-awaited answer to French President Emmanuel Macron’s call for ambitious European Union reforms on Sunday (3 June), offering olive branches on investment and help for debt-mired eurozone member states.

In an interview with German newspaper Frankfurter Allgemeine Zeitung this weeked, Merkel confirmed that she is in favour of an “investment budget for the eurozone”with firepower “in the lower two-digit billion range”.

She also commented that she still likes the idea of allocating funds to support reforms implemented by member states.

Last week, the Commission proposed putting aside €25 billion to support reforms in EU states, as well as providing €30 billion in soft loans to maintain public investment in countries in times of sudden shocks.

Merkel also spoke in detail on how she saw the future of the EU’s anti-crisis fund, the European Stability Mechanism.

She said that the ESM has to become a European Monetary Fund, with similar instruments to those in the International Monetary Fund’s hands.

What formula for ESF?

Merkel insisted that a future ‘EMF’ must continue providing long-term loans (30 years), as long as member states passed “far reaching structural” reforms.

The German government still wants to set up a European monetary fund but the European Commission does not want to surrender any responsibility for assessing eurozone finances. EURACTIV’s partner Der Tagesspiegel reports.

But the new EMF could also provide five-year loans, with some conditionality attached, for countries facing difficulties due to external factors.

“We all agree that we need to strengthen ESM, and we stand ready to discuss the exact modalities,” Dombrovskis said.

But Merkel also floated the idea of reviewing the sovereign debt of a country requesting assistance, a controversial proposal for leaders, including France’s Emmanuel Macron.

Debt sustainability

Merkel said an EMF with such competences should assess not only the economic situation of member states but also the debt sustainability, and “have the appropriate instruments at its disposal to restore them if necessary”.

France and Germany called on European Union member states yesterday (18 October) to draw up proposals by next March for a permanent system to handle crises in the euro zone by suspending voting rights, admitting that it would mean changing the EU treaty.

The idea of sovereign debt restructuring is seen as controversial as it could scare investors and create market turbulences, as happened the first time it was proposed by Merkel and then French President Nicolas Sarkozy in October 2010 in a bilateral summit in Deauville (France).

The Commission has been more cautious in the past on this issue compared with Germany’s defence of this option, shared by a group of at least eight member states.

Merkel’s comments came as investors are wary of the impact of Italy’s new populist government on the eurozone.

Markets will persuade Italians not to vote for the two populist parties that have tried and failed to form a government this month, the anti-establishment 5-Star Movement (M5S) and the anti-migrant Eurosceptic League, the EU’s budget Commissioner said in an interview with Deutsche Welle.

For Guntram Wolff, director of the Bruegel think-tank, Merkel’scomments represented a “softening” of Germany’s position on the debt issue.

“She is not asking for sovereign debt restructuring, she doesn’t have that opinion as many in Germany do,” he argued.

In his view, Merkel was not very concrete on what she meant with restoring debt sustainability because it did not make sense to be more specific. Among other reasons, because the ESM treaty also requests that the public debt of a member state requesting financial assistance must be sustainable.

Merkel’s former finance minister Wofgang Schäuble issued a more severe renegotiation of the debt terms, proposing an automatic mechanism for sovereign debt-restructuring to reduce the future costs of bailouts and enforce more discipline among profligate governments.

His ministry’s proposal was to automatically prolong the sovereign bond maturities of a country asking for help to the ESM.

He also asked that government bonds lose their status as non-risk assets.

Eight northern European countries said today (6 March) that euro zone reforms should focus on completing the banking union, improving compliance with budget rules and setting up a European Monetary Fund, with more ambitious plans left for later.

Schäuble’s position was echoed in a paper signed by the finance ministers of eight member states early this year. The group said that, as part of a future EMF, “the modalities of a strengthened framework for orderly sovereign debt restructuring in case of unsustainable debt levels should be explored”.

Austria, which traditionally had sympathised with this group’s opposition to further mutualisation of risks, did not sign the document in order to maintain its role as neutral broker during its EU rotating presidency, which starts on 1 July.